On March 14, 2016, the Department of Labor submitted its “Defining and Delimiting the Exemptions for Executive, Administrative, Professional, Outside Sales, and Computer Employees” final proposed rule to the Office of Information and Regulatory Affairs.  Commonly referred to as the “white collar exemption”, the Fair Labor Standards Act (FLSA) provides that all employees (subject to the FLSA) are entitled to overtime…unless…they are otherwise exempt.

Changing Weekly Wage Thresholds

Currently, one of the thresholds for “executive, administrative or professional employees” is that the employee must be paid a salary of at least $455/week ($23,660/year).  The significant change is that this base threshold will be increased to $921/week ($47,892/year).  The same sort of threshold for “highly compensated employees” is being increased from $100,000/year to $122,148/year.  Notably, unlike before (the previous thresholds were set in 2004), the new rule provides that the salary and compensation thresholds will be updated on an annual basis with 60 days notice in the Federal Register.  In addition, the revisions will clarify that an employer may pay an exempt employee additional compensation (bonus) without violating the salary basis requirement, so long as the employee makes the minimum $921 per week.

“White Collar” Work Still Required

Having done my fair share of wage and hour audits for employers, and defending lawsuits regarding overtime misclassification (exempt v non-exempt), this new rule actually is not too far off from reality from what I’d find after a quick review of a job description.  Employees who are classified as exempt but making less than $50,000 – that is a number I often use when doing the first sweep for potential misclassifications (I like round numbers) – are rarely properly classified.  If an employee is making less than $50,000, the chances are pretty low that he or she: (1) has primary duty of the performance of office or non-manual work directly related to the management or general business operations; (2) has independent discretion with matters of significance or supervises two or more employees; or (3) is in an advanced field of science or other specialized prolonged education background, is a specialized creative artistic field, is a school teacher, or computer analyze/programmer/engineer.

43 Million Workers Will Be “Misclassified” – Time to Audit

The Department of Labor estimates this regulation revision will affect 43 million workers, 21.4 of them misclassified as executive, administrative or professional employees.  So, how do employers handle the new regulations?  First, now is the perfect time to do an internal wage and hour audit with employment law counsel and get your ducks in a row.  It is not every year that employers who may have one (or several) employees on the fence, have a good reason to look at and reclassify employees.  It is not usual for an employer during a wage and hour lawsuit to look at payroll practices and then realize that as the company has grown or job descriptions change, employees may not be properly classified.  How do they fix it without throwing out red flags to employees that they may have been misclassified (and thus owed backwages, etc.)?  Enter the regulation overhaul.  Now is the time to do that audit, or shortly after the new rule is finalized, and make a sweep of your salaried classifications.

There are certainly employee perks with being paid a salary (consistent minimum paycheck) – and many will take a re-classification to non-exempt as a demotion of sorts.  Accordingly, how can an employer handle this issue with an employee who is seen as professional but makes less than the threshold?  Don’t forget – the FLSA mandates that overtime be paid after 40 hours a week.  That does not mean the employee cannot be paid a salary PLUS overtime!  I shock many employers with this little known concept.

Regulations Still Allow Salary PLUS Overtime – Bridge For Transitioning to an “Hourly” Employee

So, here it is… an employee who is not exempt from the overtime regulations must be paid time and a half (1.5) for all hours worked over 40 in a week (unless they are paid under the fluctuating workweek method, but that’s a whole other issue for mostly seasonal employers).  That employee may be paid hourly plus overtime or a salary plus overtime.  An hourly employee is going to have fluctuating hours each paycheck typically – some weeks he or she may be paid less than 40 hours, some weeks more (unless you prohibit overtime which is also okay so long as you pay when they go over – you can still discipline for that).  This is typical for a “blue collar” type worker.  However, many office workers or lower sales type folks would expect a salary.  That employee may be paid a set weekly salary plus overtime.  Some weeks that employee may work less than 40 hours, but they still get their salary.  If they work more than 40 hours they get their salary plus overtime.  Yes, the employer ends up paying more, but this is a very common occurrence in middle management, new professionals, or long-term highly valued support staff or other employees.

Don’t Forget About Bonuses Affecting Overtime!

Last cautionary note (I could talk about wage and hour all day)…don’t forget about bonuses for non-exempt employees!  If a non-exempt employee is paid a non-discretionary bonus, that bonus must be layered into the corresponding pay period and included in the “regular rate” (hourly rate) in order to determine the rate for overtime.  This is something that few employers realize, and many dread as an administrative nightmare.  Not only is the issue of a bonus discretionary or non-discretionary, but then how it affects the regular rate can be daunting.  For example, after paying a non-discretionary bonus, the employer has to go back and pay an additional amount for the overtime hours worked.  But I digress and get off track – if you want a quick overview – the DOL has some great examples.

In short, the final rule is coming, so it is now the time to embrace the change and prepare for its enactment.  If you haven’t done a wage and hour audit from top to bottom, now is the time.  It is easy to knock out the top and the bottom folks, but it is the middle that employers need to take a good, hard look at.